Value to the taxpayer of Metronet's capital works net of revenue used to fund these works

19  We have assumed that in each period Metronet funded its capital expenditure from a combination of equity contributions, drawn down debt, working capital injections, interest on bank deposits and a proportion of its revenue from London Underground's payments of Infrastructure Service Charges. During Metronet's administration, the public sector honoured its guarantee to Metronet's debt providers, paying 95 per cent of Metronet's debt obligations. The public sector then took full control and ownership of Metronet's assets.

20  In preparing our estimate of the loss borne by the taxpayer, we needed to calculate a value for Metronet's capital works and net off revenue from payments of the Infrastructure Service Charges that was available to Metronet to fund part of its capital investment programme. For each of the five identified capital works expenditure categories (Rolling Stock, Signals, Stations, Track and Civils), we obtained, from the Arbiter's report into capital and operational expenditure, upper and lower estimates of the costs that an efficient company would have incurred. In the case of the foreshortened, 109-day last period, the Arbiter's estimates covered a full six-month period. We, therefore, apportioned the Arbiter's estimates on a pro-rata basis.

21  From these estimates of the costs of efficient execution of the works, we deducted, on a period-by-period basis, the revenue left over after meeting Metronet's actual operating expenditure, business overhead costs and debt financing costs. By assigning this portion of the revenue to investment in efficient capital works, its use did not incur any loss to the taxpayer. After making the deductions, we inflated the differences to July 2007 prices using the Office of National Statistics' retail prices index, CHMK.

22  We included depreciation to account for wear and tear, diminishing the value of the capital works (funded by non-revenue sources) for the time between when the works were put into operation and the date of Metronet's administration. With the exception of investments in station upgrades, we applied straight line depreciation over 30 years, starting one year after expenditure on the relevant capital works. We treated all capital works on stations as being in the course of construction and therefore did not subject this expenditure to depreciation.

23  In recognition of the fact that the rail passenger had had the benefit of Metronet's capital investment from new, we assigned a value to this benefit equal to the amount of depreciation. After allowing for this depreciation neutralising benefit, we were left with estimated upper and lower bounds for the cost of efficiently executed works funded from non-revenue sources, i.e. paid for by cash from Metronet and its lenders. We considered the transfer of these non-revenue funded works to the public sector was in exchange for London Underground honouring the guarantee to repay 95 per cent of Metronet's debt obligations. We have estimated that the value of these works was between £1,470 million and £1,590 million (Figure 17).